A look into how digital banking is potentially changing the financial services and banking industry in Malaysia. Should we fear or embrace digital banking?

What is Digital Banking

Financial services and financial technology (FinTech) is supported by regulators including Bank Negara Malaysia (BNM). Digital banks allow for the offering of banking products and services to underserved and unserved markets through digital and electronic means. This includes retail as well as micro, small and medium enterprises (MSMEs).

A digital bank key differentiation is that it may not establish any physical branches. A digital bank is still required to establish a registered office in Malaysia (which also serves to handle any face-to-face complaints). A digital bank may participate in the Shared ATM Network, cash out services offered by PayNet, and offer financial services through agents.

Digital banks will offer most traditional banking services including deposits, withdrawals, transfers, checking and savings accounts. Services are provided online in real time with automation and using technology/analytics to drive smart personalized engagement. Various services will be offered through APIs and will increasingly feature AI.

Malaysia will issue up to 5 licenses for digital banking and are expected to start operations in 2020 1H. Forward looking banks as well as fintech players with a strong tech focus are expected to form alliances to apply for the licenses.


Digital Banking Regulation in Malaysia

BNM has released an exposure draft on December 27, 2019 whereby feedback to BNM should be submitted by February 28, 2020. During the initial phase, digital banks will be subject to simplified regulatory requirements to promote this foundational phase. Digital banks will be required to demonstrate their viability and sound operations including achieving a defined asset threshold no more than RM2b in the initial 3 to 5 years of operations.

Currently licensed banks may apply for a separate digital bank license as a separate entity. This is not to be confused with currently licensed banks digitalising their current business operations.

Digital bank applicants must demonstrate the following:-

  • Robust risk management and compliance capabilities.
  • Application of transformative technology in development of financial services including scalable and agile tech stack.
  • Access to deep and robust customer analytics.
  • Continuously serve as source of financial strength.
  • Requisite Shariah expertise (for Islamic digital banking).

An exit plan is required to be submitted as well for the first 5 years of operations including potential triggers, likely options, potential impediments, and sources of funding and liquidity for exit.

After the 5th year of operations, digital banks must comply with all equivalent regulatory requirements applicable to a licensed bank and minimum capital funds of RM300m.


The Potential Impact of Digital Banking

Digital banking serves to provide banking services where traditional banks have shunned such as the underserved, unserved and SMEs. This helps lift up companies and communities which now have access to banking facilities leading to economic growth and a positive impact for the country. Digital banks will also incur much lesser costs than traditional banks driving down costs of banking services through automation and self-serve technology.

Existing traditional banks do face some disruption if they do not innovate and transform to meet the technological changes. New digital banks will also be without the encumbrance of legacy systems/infrastructure and unprofitable physical locations. Traditional banks may also increasingly work with newer more tech savvy digital banks. Traditional banks are also expected to focus more on key services with the highest profitability especially capital intensive requirements that newer digital banks may not have the capability to handle. There will also still be a requirement to service the older less tech-savvy generation.

Banking clients will increasingly be used to and demand customer service from any location in the world, 24 x 7 availability of banking services, faster and automated approvals, and smart predictive personalized services. Real life habits of people will be increasingly reflected in digital services offerings. And while business analytics and AI remain in its early stages, it will become increasingly important.

Digital banking will slowly but surely impact how banks and banking clients behave into the future.


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